Nidec Corporation
Q4 2020 Earnings Call Transcript

Published: 22 Apr 2021

[Yoichi Orikasa:]

Dear all, thank you very much for joining Nidec Conference Call. I'm Yoichi Orikasa, General Manager of Kyoto Branch at Mitsubishi UFJ Morgan Stanley Securities. As we kick-off the conference, I'd like to ask you to make sure all the materials are ready in front of you. If not, please download the files on Nidec's homepage right now. Please note, this call is being recorded and the conference materials will be posted on the company’s homepage for the coming week for investors and the analysts who are not able to join today's call.

[Jun Seki:]

Hello, everyone. Jun Seki.

[Yoichi Orikasa:]

And Mr. Akira Sato, First Senior Vice President and the Chief Performance Officer.

[Akira Sato:]

Good evening everyone.

[Yoichi Orikasa:]

First, Mr. Sato will make a presentation. After his presentation, we will move onto a Q&A session and Mr. Seki and Mr. Sato will answer your questions. Mr. Sato now present Nidec's Q4 fiscal year 2020 results future outlook and management strategy. Mr. Sato, please go ahead.

[Akira Sato:]

Thank you very much. Good evening, everyone. Welcome to today's conference call. My name is Akira Sato, Chief Performance Officer of Nidec. Today, Mr. Jun Seki and myself, will be your main speakers and answer your questions. And joining us also is Mr. Masahiro Nagayasu, General Manager of Nidec IR team. For the forward-looking statements, please see slide number two of our presentation material for details. Now, I will give you the key figures. Please see slide number three for the fiscal year 2020 full year results. As shown on slide number four 12 months net sales stood at record high ¥1,618.1 million or 5.4% higher year-on-year. The operating profits for the corresponding period increased 47.4% year-on-year to ¥160 billion. The last quarter operating profit ratio hit 10.3% due to enhanced profitability through WPR4 program implemented since the start of fiscal year 2020. And the sales declined and double-digit operating profit ratio is successfully maintained for three consecutive quarters. Profit attributable to owners of the parent for the full year increased 108.7% year-on-year to ¥122 billion. On slide number five and six, you have steps charts showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively, by product groups with exchange rate effect, eliminations and the structural reform expenses. As you'll see slide number five, despite the decline in exchange rate fluctuation, all of the business segments made an increase in net sales year-on-year and the full operating profit does well. The decline in exchange rate and automotive have been covered by the remaining business segments, thus the significant year-on-year increase of operating profit has been achieved. Slide number -- please see slide number nine. For the fiscal year 2021 forecast, we are aiming full net sales of ¥1,700,000 million. Operating profit of ¥180 billion and operating profit ratio of 10.6%.

[10:]

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[A - Yoichi Orikasa:]

Thank you very much, Mr. Sato. Now, we'd like to turn to the Q&A session. Mr. Seki and Mr. Sato will be pleased to answer your question. Okay. Our first question today is from James Pulsford of Alma Capital. James, please go ahead.

[James Pulsford:]

Thank you very much. Could I ask you a couple if I may? The first one is very simple. Your R&D spend last year, I think you were targeting -- expecting to spend 85 billion, you actually spend 67.3. I think also the capital spending you made last year 89 billion was rather blurb in your plan. I know this year you're expecting to spend more. Could you just comment on that please?

[Akira Sato:]

Yeah. First of all, R&D, it's -- there has been down to that level are you mentioned, mainly due to the more efficient around the activities. For instance, in European division, we have reorganized the R&D activities into one and also we utilize kind of shared service activities and also the R&D activities such as testing that is -- we have the testing inside of the R&D department, rather than outsourcing to the a testing company. With those measures to reduce R&D costs the total expenditure for R&D has been decreased. And capital expenditure, as you see that significantly down to less than ¥100 billion in fiscal year 2020, mainly due to, of course, some delay to install the machine. But our main portion is right now, all the machine. Market is very soft. That’s why we weren't able to get the -- and lower price what we procure other machines. That's kind of main point. Maybe answer to your question. Is it fine?

[James Pulsford:]

Thank you. And can I ask a separate question, please? I wonder, is it possible to you to comment on the current status of orders and new orders that you may have received? Looking at a number of years for your E-Axle and traction motors there, if you have figures you can share with us of for example, cumulative orders by a certain year or things like that, this will be very helpful. Thank you very much.

[Jun Seki:]

Okay. This is Jun Seki. Thank you for your questions. Let me introduce several members. Excuse me. First, we always referring ordering bodies and possible -- high possibility ordering bodies 2025. Our target is 2.5 million. Actually what we receive in high possibility of receipt is already reaching 2.8 million with compression ratio 70%. So, if we use real number customer, giving us is already exceeding time by time to increase it. But we don't change our number as 2.5 million, this why it is actually an order only from customer looks too optimistic. So, like 2020 results showing much far lower than what we received.

[James Pulsford:]

Thank you. That's great. Could you just repeat the first one? I couldn't quite catch some of the numbers. You mentioned the 2.5 million targets. You're already at a 2.8 million. Then you gave a couple of other figures on -- which I'm afraid I couldn't catch. Could you --

[Jun Seki:]

Right, right, right. I do. I do. 2.8 million with 70% compressor sales.

[James Pulsford:]

Okay.

[Jun Seki:]

Yes. So, therefore, when calculate quickly.

[James Pulsford:]

Okay. Now I'm --

[Jun Seki:]

I think -- yes, so it's 3.5 million or something. 3.8 million we might get by sales.

[James Pulsford:]

Or more.

[Jun Seki:]

Or 4 million, so, yes. At this moment I have a very optimistic volumes, so that's why we're saying 2.5 million.

[James Pulsford:]

Yes. Right. Excellent. Good. Okay, look, thank you very much, indeed. That's very kind.

[Jun Seki:]

Thank you.

[Yoichi Orikasa:]

Mr. Pulsford, thank you very much for your question. Our next question is from Ramsai Neelam of State Street Global Advisors. Ramsai, please go ahead.

[Ramsai Neelam:]

Hi, Jun Seki-san, first of all congratulations on your upcoming position. I wish you all the best with that. My question is around -- I mean, just want to follow up the previous question. You mentioned the mix of traction motors and E-Axle, so that is 60-40. Can you confirm that?

[Jun Seki:]

Yes. So, I'm talking about pure EV and plug-in-hybrid, but therefore it's pure…

[Ramsai Neelam:]

Okay.

[Jun Seki:]

… given by motor. Yes. And then I'm not -- I'm excluding motor for hybrid -- micro hybrid. With that assumption, total number, we are assuming to be 2.8 million with compression vessels. And then its lastly, I would say, 70% is traction motor axel, 30% motor alone.

[Ramsai Neelam:]

Okay. Great. And slightly on a different topic. So, I was kind of expecting the environment in the precision motor segment, because we have Seagate departure in the last quarter. So, I mean, can you give some color on the impairment costs related to this production capacity that is allocated to Seagate, in HDD motor segment?

[Akira Sato:]

Yes. This is Sato stating. So this -- maybe March quarter we posted the -- ¥1.3 billion of this structure forming the expenses in spindle motor area. And -- but in Q3, 19 -- 1.9 million, so total is ¥3.2 billion of kind of impairment cost of early retirement package for -- relating to kind of business. And also maybe June question, maybe we will pause really more for kind of departure of the share business, maybe to BMEN or something like that. So total maybe high to ¥6 billion of impairment cost of restructuring cost which we posted by departure of Seagate business. Is that fine?

[Ramsai Neelam:]

Thank you for that. Yes. That should help. And on the similar lines, can you give the profit breakup between the HDD and non-HDD and also the price for HDD -- I mean, outage ASP.

[Jun Seki:]

You need the hard disk drive ASP situation?

[Ramsai Neelam:]

Yes. I mean, I want to know the operating profit margin for HDD and non-HDD within small precision motors business.

[Jun Seki:]

So small precision motor business the OP margins on the hard disk drive was a -- for the fourth quarter there was a 31.3% and the overall margin was 15.2%, then the rest is, we do have something like a -- roughly a 10%. Is that fine?

[Ramsai Neelam:]

Yes. Yes. That should be fine. And on the ASP side, I can see there is a significant improvement on the ASP, yes.

[Jun Seki:]

Spindle hard disk drive, right?

[Ramsai Neelam:]

Yes.

[Jun Seki:]

So, for this quarter, ASP of our spindle motor for hard disk drive was something like 789.1 -- I am sorry -- $7.40, which is really down from 7.46 in the …

[Ramsai Neelam:]

Yeah.

[Jun Seki:]

Okay.

[Ramsai Neelam:]

Yeah. If may I -- can I ask like, on slide number 17, which is E-Axle related investment. So, is that including the potential M&As required for vertical integration as well or it is excluding any kind of M&As in that particular area?

[Akira Sato:]

Yes. this is just the R&D cost and also structure extension for traction motor business. So we exclude the M&A in this graph.

[Jun Seki:]

Therefore, this is investment when we grow just to organic side. Potentially, we may have just as any other companies, but this is not included in this chart yet.

[Ramsai Neelam:]

Yes. Thank you. And probably the last question for me, is there -- I mean, general industry we've been hearing about the chip shortage kind of halting the production for many of these things OEMs. So, these experiencing that kind of volume decline from your side. And what's your expectation around the failure in coming quarters?

[Jun Seki:]

So, this is Jun Seki speaking. So, let me reply. Actually segment-by-segment sessions very different then heaviest impact looks like coming into our automotive area. It's nothing strange because it's a huge site. And they're using lots of semiconductors and plastics and a couple -- here so. When -- once we have some shortage some way here, suddenly they have to stop the line. So -- and then, automotive, I think, there new car demand expectation was around the 86 million, 87 million this year. I think, past -- at least first quarter looks going like only 8 million or less pace, quite slow. If we look at the -- I think, most of those reduction is coming from semiconductor impact. I know semiconductor is number one element, but even semiconductor element is disappeared, we have a plastic , so they need to be covered it from all areas. Then, if we look at the data inventory in North America, it says standard is 75 days, but I've never seen 75 days. Usually, they have a like 85 to 90 days on average, but current data inventory in North America is less 40 days. I think it's 39.2 or something. It's an extremely low. I heard that it’s record low. So, demand is there just the automotive company tended to build. So, we called this is a positive title bump. Once everything fits, suddenly they increased production volumes. Now, we -- it's a good chance to reconstruct our cost again because services road, but we believe it's coming maybe June to drive things. That's what you're seeing. Meanwhile, we have some impact for home appliance and commercial appliance, but so far customer demand doesn't show a need to -- actually increasing. And then we are following those increase volumes. The problem is all those supplier is requesting us to increase price. So, many us are still arguing. General impact is 4% to 5%. Of course, so we don't approve all of this. So, it's still arguing, but finally, we negotiate with our supplier and our customers. And then, we need to absorb this increase -- remaining increase by other cost reductions. That's the situation.

[Ramsai Neelam:]

Yeah. Thank you. That’s very helpful. Yeah. Thank you very much.

[Jun Seki:]

Thank you.

[Yoichi Orikasa:]

Okay. Thank you, Mr. Neelam. Okay. Our next question is from Mr. Bradley Snyder. Bradley, please go ahead.

[Bradley Snyder:]

Yeah. Hi. Just quick question on the Mitsubishi Machine Tool acquisition. It looks like the sales figures -- they fell pretty dramatically. I assume that's due to the pandemic. I think it was from 40 to 23. So, I'm just wondering if there's any other reasons for that. And also what should we put in for the coming year for 2021 as sales expectation, and what margins would you see on that business as well? Thanks.

[Unidentified Company Representative:]

The initial is heavy. Because of COVID-19 and also some kind of a stagnant market in industry area or postponing the CapEx in any factory, that's the sales would be done to ¥25 billion per year, maybe this fiscal year. And maybe that backlog or order intake has been increasing at this point. So that in fiscal year 2021, on year basis the sales will be alarm for the medium year in fiscal year 2021. But we are not sure when we can -- we're really able to close this deal, because of antitrust investigation is going on. That's why the -- I'm not sure when at this point. But anyway, anyhow sales will be around ¥30 billion of our top line. And maybe project wise, maybe its still losing money. And together with increasing the top line its going to be break even in fiscal year -- late of fiscal year 2021, that's kind of situation.

[Bradley Snyder:]

Thank you. That's very helpful.

[Jun Seki:]

Bradley, this is June Seki-san. Let me add a few more comments. We are expecting this heavy industry machinery division to supply as many of gear machinery equipment to Nidec, automotive divisions, because our goal is 10 million productions in 2030. And then we -- to do that, we need 30 -- over 30 a line over 300,000 capacity per year. So one line capacity is 300,000 components per year, and we need 30 of those. And then we are going to set that around 10 to 12 by '25. And with this heavy industry has significant high technology, but very expensive, that's why there is the very low volumes, and they're not so profitable. And then we assure once we officially absorbed them, we can compare their fixed costs. And then we can make an intensive order to them. And then while we're glued, we can show everything very transparently, then we can estimate what they have to change and what they don't have to change. Usually, fixed portions, they don't need change for long life, it's over 80%. So that makes their R&D cost very low. So I'm showing just maybe 20%-30% of our activity. But I'm sure we can make them more revenues because of our demand and demand from Nidec ourselves. And then we can make the cost very similar. And just the actual comment.

[Bradley Snyder:]

So I understand it sounds like you're mainly buying that into producing the machines you need internally to hit your E-Axle target. So I guess should we think of that acquisition as more like CapEx, is that maybe why your CapEx budget was lower?

[Jun Seki:]

Yes, 260. Thank you.

[Bradley Snyder:]

Okay. Great, thanks.

[Yoichi Orikasa:]

Thank you, Mr. Snyder. Let's move on. We take additional questions from Ramsai Neelam of State Street. Ramsai, please go ahead.

[Ramsai Neelam:]

Yeah. Thanks for taking my question. So just to understand the -- Nidec has the new business area and then mobility area like E-bicycle and E-scooter and maybe the Mini EV. Is that -- can we give us some -- what is it total market scope there or our total market size, if we have some numbers around it? And what's the scope of Nidec going into that market. I know it's a significantly -- very big market, but give us your strategy to -- acquire into that market or capturing the business in that market.

[Jun Seki:]

Okay. Let me reply. And then after my reply, if you have any additions, please. First about compact EV, new EV, we don't know -- to be honest, we don't know yet. It used to be very small that homerun win completely breaks . They have a $4,000 EV like actually, they sold 200,000 EV by 200 days from there started themselves. So, it wasn't much. And then, maintaining data for those sales is a 72% of zone buyer, parcel who was born after 1990. That means most of the people assumed it is 20 to 30 years old, mostly 20 something, yeah. And then 60% of this buyer female. You may not be so familiar with number, whenever you go female buyer vehicle is allowing 30%, most of those cases, even if they drive, but all of that type therefore naturally may the owner majority, but this car is loved by younger guy. So, if we look at their behavior, they like more data points and the fashions. This is an Amazon and so they need to spend a lot of money. So, they don't want to spend so much money for automotive. Meanwhile, if they use the public transportation, like train to go to office, it's a danger because of COVID-19. So, I think -- I don't know if they're buying by themselves or money to purchase new cars, but that's right. And then we already got the whole order from their competitor. So their competitor is going to chase what their buildings, because buying this car is very different from the current automotive customers. So, so those parts -- buyer doesn't move from current decreasing . So, this is pure additions. So if this happens, not only China, but also India, Latin America in Africa, potentially demand is probably about 200 million addition on top of currently number. This is huge. It may not grow so far, but the once it breaks, it's probably grow very, very fast that's Mr. Nagamori is predicting and we also. So, maybe we don't know, let's say at least 100 million by 2030, that’s we have seen. Meanwhile, in bike including E-bike is -- I think this is the segment just replacement from gasoline delivering motorbikes to motor delivering motorbikes because current share of the EV in this area would must turn. I think a new bike sales volume annually is around the 20 million to 30 million. So, it's a big potential, particularly in like Indonesia, like India, initial lever from motorbike is much worse than automotive vehicle for the vehicles. So, government is very serious to shift from gasoline driven motorbikes to motor driven motorbikes. So, I think that few of these around 2 million -- 20 million to 30 million annually. And then motor shifted bicycle, this is also booming, both -- very high cost country and locals countries. So, it's a big potential, but we need more study for this area.

[Ramsai Neelam:]

Okay. And then to follow up on that -- so the technologies that Nidec already have or how to invest little amount in this area to produce the market requirement and also --- and comment on this margins, because it may require new investments around this area.

[Jun Seki:]

We clearly have technology. Actually, probably real -- because of current players. For example, in China, auto -- motor driven motorbike is very standard. Actually in China, probably it's much more than engine driven motorbike, but their quality levels, durability levels and then some reliability, I think, it's not so high for us, very easy to overtake with same price. So, definitely we have. And then for mini in these sites, at this moment, we are seeing Korea preference from Chinese customers. I mean, Chinese OEMs, they want to use local people -- locally made motors. Of course, we can localize, but our case, we think we are Japan brand not Chinese brand. So -- but we are convincing them. Sooner or later they want to explore to zones. I think there is marketing even in Japan, but customer don't trust, Chinese make motors. If you have , it's much easier to convince expose customers, that communications. So, we're going -- we are positive going to this area.

[Ramsai Neelam:]

Thank you. That is really helpful. Thank you. I appreciate that.

[Jun Seki:]

Thank you.

[Yoichi Orikasa:]

Thank you, Ms. Neelam. Next question is from, again, James Pulsford of Alma Capital. James, please go ahead.

[James Pulsford:]

Thank you very much. I wonder could you comment that on the majors -- major news today is that you're taking over as Chief Executive Officer from Nagamori. And if you could -- I'd be just interested to hear any other in practical terms how decision making may change at the top. What Nagamori then role will be within the company and how that will impact in work? Can you just talk a little bit about that and how big a change that will be going forward to what's been in place over the last year?

[Jun Seki:]

Okay. Thank you, James. We have waited before this question. We wonder why we don’t get this question. It's a very natural. Yeah. Thank you. Before we end up time. As we repeatedly explained to this place, we have -- Nagamori and myself as a very cross-communication day by day, week by week, and then, of course, from the beginnings now I'm going to sound what I need to take over senior position in some dates. Of course, like one year, it was impossible for me. I need language to understand more deeply or need accent and then employee strengths and weaknesses of products and our customers. And then he said, maybe if you have later completely set of in our company. And then if I show a strong leadership and also leadership or executives and how employees discussion from the beginnings or more than one year. But much if he started to say he did not satisfy and little shy to say by myself, just to tell you what he said, but he is satisfied way of my management. It's pretty similar to. It's, of course, because I'm copying intentionally and then also outcomes as like a 2020 financial results and also some reputation from peoples in the management side, employee side. So, I didn't expect about it. He said he wanted to and then since then we've prepared, but I didn't feel comfortable to transfer him missing once because employee warnings, a shareholder warnings, investor warnings, and then we discussed, we shouldn't have a very gradual shift. So, as straight answer to you, we have some change for BOD, but it's nothing significant. Nagamori take a decision for all important things. So, let's say, over US$10 million investment is important, but all decided by Nagamori. Not a decision for those, quite few, me like before, even like $10,000 investment went to him, day by day he must made -- make us huge decisions. So those come to me, not to him. So, I take over those delegations, but for the company, the basis -- important decisions I asked him to decide. So, from that point, I would say not major change also I take over for yours. So he stayed this company as the like largest shareholders, founder, and then representative director, chairman and chairman of BOD. So, for all input and decisions such as high investment or, new idea to expand or sometimes, Nagamori son and myself make together. And then, for me, for day by day operations, I used to have the only automotive and appliances industry commercial, but from April 1, I'm taking responsibility for Precision Motor Group company as well. So for like day by day I take care of that. He stayed for major decisions. And even those day-by-day communications, some are very important to discuss with him. I keep one on one with him, at least one per week, if necessary. And then we don't make any filament between him and myself. And last decision to go ahead before this shift is also headed by executive lineups. I brought them many names, which I can rely on, and then I need also hire from outside. So, executive lineup is much more mature, so one year ago. So that's also made the decision here. So, this is the status. So, from now to 2030, we're going to grow from current 1.6 million to 2 million, 5 million and 10 million. And then time by time, if we create a nice distance, Nagamori son probably shift to the more delegation to me, but it's not happening all of sudden. We do this gradually. That's how you must explain to you.

[James Pulsford:]

Thank you. That's clear. Is there anything -- so I can see that I see the change is more, as you say, for the day-to-day operation of the moment, are there any other changes that you've decided that are happening in six months or three months or a year where you decided other than what you've just outlined about the -- the day-to-day operational stuff across the company and the best …

[Jun Seki:]

Yeah. Day by day, I don't. some more decision to go Nagamori. I take care of all of those.

[James Pulsford:]

Okay. No, I understand.

[Jun Seki:]

No other major change.

[James Pulsford:]

That's very good. And is there anything else that decided, because you mentioned stage thing. Is there anything that -- this is what's happening from now? Is there anything this is plan that's going to change that you're going to take on more responsibilities or equal to less than six months time or a year's time? Anything else …

[Jun Seki:]

That's right. That's right. We intentionally make this point in time, because we trust each other. And so he believes anything scientifically happened, I definitely to be postings and to discuss with him. So he understood. So, we don't have to define it to clear at this point, because of the deep relationship.

[James Pulsford:]

Right. Okay. All right. Good. Okay. Thank you very much for that explanation.

[Jun Seki:]

Thank you.

[Yoichi Orikasa:]

Mr. Pulsford. It seems that we are running out of time and probably we can accommodate just one shot more question. If the senior management of the company will come -- welcome any relevant question. Otherwise, we would like to conclude this call. Okay. Now, there seems to no father questions, and that we would like to conclude the conference call. I'd like to appreciate for your participation. Should you have any further questions, please do not hesitate to contact Nidec Corporation or your sales representative at Mitsubishi UFJ Morgan Stanley Securities. Thank you very much.

[Akira Sato:]

Thank you everyone. See you next time. Bye-bye.